IRS won't reject tax returns if they do not include Obamacare disclosures

An insurance store advertises Obamacare in San Ysidro, California, U.S., January 25, 2017.

Mike Blake | Reuters

Obamacare's "individual mandate" is looking a little more like a "suggestion" under the Trump administration.

The Internal Revenue Service says it will not systematically reject income tax returns that fail to disclose whether the tax filers have health insurance or not.

The move by the IRS, quietly made Feb. 6, is in response to an executive order by President Donald Trump that authorized federal agencies to lower the financial burden of complying with Obamacare rules.

But the decision raises the question of how aggressively the Trump administration will seek Obamacare tax penalties from people who lack health insurance, and who don't disclose that fact on their tax returns.

The IRS noted Wednesday that tax filers remain responsible for any Obamacare penalty they owe. It also said that taxpayers who don't disclose their insurance status could end up getting questioned by the agency.

The decision by the IRS had reportedly been disclosed two weeks ago to tax preparation companies, but was not announced publicly. It came to light Tuesday through reports in the San Francisco Chronicle and Reason.com.

The Affordable Care Act since 2014 has required nearly all Americans to have some form of health coverage or pay a tax penalty. That requirement is known as the individual mandate.

That mandated coverage can come from insurance through a job, Medicare, Medicaid, military programs, or from individual health plans like those sold on and outside of government-run Obamacare exchanges like HealthCare.gov.

For the past two tax filing seasons, people have been required to indicate on their tax returns whether they have such coverage. If they don't, filers either had to claim an exemption from the mandate, or indicate that they are paying the penalty for not complying.

For the 2016 tax year, the penalty is the greater of $695 per adult, or 2.5 percent of taxable household income.

This tax season, for the first time, the IRS was set to "reject tax returns during processing in instances where the taxpayer didn't provide that information" about their health coverage status, the agency said Wednesday in a statement emailed to CNBC. Those returns are called "silent returns."

But, the IRS noted, "The recent executive order directed federal agencies to exercise authority and discretion available to them to reduce potential burden" on people complying with Obamacare rules.

"Consistent with that, the IRS has decided to make changes that would continue to allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn't indicate their coverage status," the agency said.

But the IRS added that the ACA's legislative provisions "are still in force until changed by Congress."

"And taxpayers remain required to follow the law and pay what they may owe" in penalties for failing to have coverage, the agency said.

And the IRS also said that by not automatically rejecting silent returns, they taxpayer can have their returns processed, which minimizes the "burden on taxpayers, including those expecting a refund."

"When the IRS has questions about a tax return, taxpayers may receive follow-up questions and correspondence at a future date, after the filing process is completed," the agency said.

"This is similar to how we handled this in previous years, and this reflects the normal IRS post-filing compliance procedures that we follow."